Apple Stock Is Rising Because the Latest Big News Was More Exciting Than Expected

Wall Street is always an expectations game. The question is never about absolute performance: It boils down to how a company does relative to what Wall Street anticipates. That dynamic was in play heading into Tuesday’s Apple’s iPhone 11 launch event.

Expectations on the Street were low, and the performance cleared the bar. That has
Apple
(ticker: AAPL) stock gaining ground on Wednesday.

The announcements fell into three categories. There were, as expected, new phones—the iPhone 11, the 11 Pro, and the 11 Pro Max. Apple made a couple of other hardware updates, in particular the launch of the new Apple Watch Series 5, plus a modest tweak to the entry-level iPad. And there was significant news about Apple Arcade, the subscription videogame service, and Apple TV Plus. They will each be available at a monthly price of $4.99.

Most Wall Street commentary on Wednesday focused either on the modest upgrade to the phones or on the pricing for the streaming-video service, which analysts saw as surprisingly aggressive.

Morgan Stanley’s Katy Huberty writes that the event was more compelling than expected for three reasons. She cited lower-than-expected streaming-TV pricing (and the inclusion of a year of free service with device purchases). The analyst also noted a more aggressive approach to pricing of devices than expected, in particular on the iPhone 11 ($50 cheaper than expected), and the older Series 3 Apple Watch (now just $199). And she said the camera and battery-life improvements in the new phones are significant, addressing key concerns among consumers.

The stock remains a top pick heading into 2020, Huberty says.

Needham’s Laura Martin was upbeat, too. She raised her price target to $250, from $225. Her view is that Apple is transitioning from a hardware company to a business model that combines hardware and content.

That approach drives up Apple’s valuation by increasing revenue per user as more devices and services become available, and by keeping people in the iOS ecosystem for longer. Martin thinks Apple can get users of 10% of the iPhones now in operation to sign up for both Apple Arcade and Apple TV Plus. Working with an estimated base of 950 million phones, she calculates, the two services can produce $11 billion in annual revenue, and $8 billion in gross profit.

Assuming a valuation for the company of 10 times earnings before interest, taxes, depreciation, and amortization, that would imply an extra $80 billion of market capitalization, or about $18 a share, Martin says.

Wedbush analyst Daniel Ives called Apple’s decision to offer the streaming-TV service at $4.99 “a show stopper,” and “a major shot across the bow at the likes of
Netflix
and
Disney.
”

While content on the service will be limited at first, Ives thinks that with a base of 900 million active iPhones, Apple should be able to reach 100 million streaming customers over the next three to four years. (Remember that Apple said it would give a year of free service to anyone who buys new Apple hardware. That could have the added benefit of creating demand among people on the fence about upgrading to iPhone 11.)

Along similar lines, Macquarie’s Benjamin Schachter said the decision to price Apple TV Plus so aggressively shows the company is following in
Amazon.com
’s (AMZN) footsteps, using video to sell other products. “While perhaps not a loss leader in the traditional sense, this signals a shift to focusing on customer [lifetime value] in its ecosystem,” he writes. “We continue to believe that this will eventually lead to an Amazon Prime-like bundle” over the long term.

Piper Jaffray analyst Michael Olson called the updates “more incremental than dramatic,” with phones getting improved cameras, faster processors and longer battery life. Like other analysts, Olson noted that at $699, the iPhone 11 is $50 cheaper than expected.

Some analyst consider that an effort to stir up extra demand, while others see it as Apple taking advantage of falling component prices. (Those explanations are not mutually exclusive, of course.)

Olson says he views the iPhone 11 product cycle as an off year, ahead of the emergence of 5G iPhones in 2020. He remains a bull on the stock, reasoning that investors should be satisfied as long as the services business and hardware other than the iPhone continue to perform well.

Chris Caso, who follows Apple for Raymond James, saw the whole event as a bit of a yawner. (Some of the attendees seemed to think the same.) Caso says the biggest news was the lower-than-expected price for the entry level iPhone 11. “Since the hardware on the new iPhones is essentially the same as last year’s phones, we think there’s a good chance that the price reduction is proportional to the reduction in cost,” given declines in prices for both memory and other components, he writes.

Nomura’s Jeff Kvaal was among the more bearish reviewers. He called the launch “marginally disappointing even relative to low expectations.” He said that while investors may be inclined to look past the changes to the iPhone 11 toward the more meaningful upgrade to the iPhone 12, pitfalls for the stock remain.

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